Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 80 - 99)

WEDNESDAY 7 DECEMBER 2005 (Morning)

MR ROBERT CHOTE, PROFESSOR COLIN TALBOT, MR JOHN WHITING AND MR MARTIN WEALE

  Q80  Ms Keeble: That was also new.

  Mr Weale: It is perfectly true that we have not had those sorts of benefits for a very long time, but we do have a body of theory that does imply that means testing does reduce saving. I should add that that does not in itself mean means testing is a bad thing.

  Q81  Ms Keeble: In all the discussion you have with people about pensions what you hear again and again are people in their late thirties saying, "I haven't got round to paying for a pension." I do not hear them saying it does not matter because they can live on state benefits in a council flat when they are 80 and have the pension credit. The means testing thing and the idea that you can live comfortably on means tested benefits never seems to be an attractive life option for younger people.

  Mr Weale: It depends on what part of the pensions process you are looking at. I think financial advisers have felt very uncomfortable about trying to encourage people who are likely to be affected by means testing to save in pensions because they run the risk that they will be very low. The Government produces a table in the Pre-Budget Report about how high marginal deduction rates affect people in work (Table 4.2) and I do wonder why we do not have anything like this for people who are retired. It seems to me highly pertinent. It would not answer your question about what is influencing people's decisions but it would provide us with the numbers on the scale of the problem taking all the rather complex benefits together.

  Q82  Chairman: For MPs all this stuff is anecdotal because advisers come along and say they do not want to sell to people. The decision is 20 or 30 years down the line and young people are not saving for pensions anyway. This idea of it being related to means testing does not seem to have any evidence to back it up. I have never heard a person on pension credit saying, "I've never had to save because I am on pension credit."

  Mr Weale: I think what we have is what you rightly describe as anecdotal, but we also have a body of theory about how people who understand the system are likely to behave. If you say that the pension credit does not discourage saving for the people affected by it, that is a proposition that, if true, relies on them not understanding its consequences. My own view is that governments should be rather shy of promoting policies that work best when people do not understand them.

  Q83  Mr Fallon: This is not just anecdotal, is it? Turner concluded that means testing over time is a major impediment to effective voluntary personal saving.

  Mr Weale: It depends on the scale of the means testing who is affected by it. One cannot just say means testing has that effect. There are degrees of means testing and the stronger they are the more they become an impediment to personal savings, so it is a relative not an absolute. I think if he had produced a report saying that means testing does not matter because we have not found any evidence or theoretical basis for thinking that it affects saving then people would have said that he was living in a world where people did not respond to economic incentives and were not providing a sound basis for policy.

  Q84  Mr Fallon: I would like to ask about the Long-term public finance report, it is Box 4.2. Turner costs its package at £7.6 billion and indexing the Guarantee Credit is another £6.4. The Government says, "As the Pensions Commission has stated, `against this level the cost of the package is £14 billion' in 2020 expressed in real terms." If that is right, what was the row about between the Chancellor and the Turner Commission just before publication? Is this what the row was about, the assumption that the Guarantee Credit would be indexed in that way? It is page 39 of the Long-term public finance report.

  Mr Chote: The debate about what you assume for earnings or price indexing was one part of it. The other part of the debate was whether you assume the savings that arise from the rise in the state pension age for women have in effect already been spent or whether, as Turner in one of his projections was implying, if you look at the pensions spending in isolation then there is a saving there and that if you start to be more generous during that period you are absorbing that. The Treasury has argued, I think probably with some justice, that that would be a reasonable line of argument to take if the decision on the women's state pension age were part of his package, but in fact it has already been out there. It has not actually been spent and he has not clearly said where you would spend it, but it is clearly already on the books. In some sense I think there is a bit of justice on the Treasury's side there in saying that it is somewhat unfair to include that saving. On the other hand, the DWP's numbers have been suggesting that they look at earnings indexation over the longer term and that seems to be a reasonable thing. If you do not earnings index the pension credit then you do get a situation where the possible state support just becomes less and less generous relative to the standard of living of people. Is that a plausible baseline for an assumption?

  Q85  Mr Fallon: I want to be clear whether or not Box 4.2 resolves the row so that there is no further factual dispute about the costs of Turner. Are we clear now about the actual costs or is the Treasury?

  Mr Chote: I have not gone through this box in detail so I would not want to make judgments on that.

  Chairman: Could you let us know by this evening?

  Q86  Mr Ruffley: He is not kidding either, he means it!

  Mr Chote: The clarifying note that Turner produced after the row was running for a while certainly made the situation somewhat clearer on this point about whether you are assuming that he can count the savings on the women's state pension age as being part of his package and then the issue about whether you are assuming the earnings. It seems to me that there is more justice on the Treasury side in one of those and there is more justice on the Turner side on the other.

  Q87  Mr Love: In his statement the Chancellor said that he wanted to increase the number of homes built in the UK from an average of 150,000 at the present time up to 190,000, which he claimed was the rate of new household formation, yet Kate Barker in her report recommended that there needed to be 70,000 to 120,000 new homes built if we were to keep the rate of long-term house price inflation down to a reasonable level. I think it was 1.8% she was suggesting. On this basis, is the Government doing enough to make homes more affordable for future generations?

  Mr Weale: I think very much not. I think the Government is terribly confused about whether rising land prices are a good thing or not. They talk in the Pre-Budget Report about how household wealth has risen very sharply since 1997 because of rising land prices, but fundamentally it is an increasing burden on the future. I must say, I think what is needed is a very substantial willingness to make extra land available for housing. I think the focus on real estate investment trusts is to some extent missing the point. That is allowing more money to go into buying the land and not making more land available, but we have to have more land available in order to avoid the sort of increase in the price that we have seen in the past and I do not think the Government is doing enough about that.

  Q88  Mr Love: Let me take you on to that because they are carrying out a consultation on the introduction of a planning gain supplement. Will that do anything to increase the supply of land for new homes?

  Mr Weale: I do not think it will. I have forgotten what it was called last time we had it in the early 1970s.

  Mr Whiting: It was the development land tax.

  Mr Weale: It is something that has been tried before. It seems a good idea in principle because if people make gains because of changes in planning rules why should they not be taxed and I agree with that and why should they not be taxed more than the normal capital gains tax process would deliver. Perhaps it is a bit less clear why that should be the case. I do not think the tax on its own is going to do that.

  Mr Whiting: There is obviously a very careful balance needed here. Again you can sympathise with the idea of taking a greater proportion for the state for the general local good of what is a potentially substantial uplift in value but, of course, that has already been taxed and if you do try and tax it too much then it is one of those classics where the goose may stop laying the golden egg, which is exactly what happened with the development land tax. The development land tax became too complex, it tried to take too much and it choked development. There is a very careful balance to be had here.

  Professor Talbot: One crucial difference, as I understand it, between the development land tax and the new proposals is where the money goes. The new proposals are that money will be retained by local authorities and that changes the incentive structure for local authorities to free up more land for planning purposes. If that worked then obviously it would potentially create more land for housing development.

  Mr Whiting: I agree with that. I think that is potentially a very important feature because it does focus it on local benefits rather than the money disappearing into a central pot.

  Q89  Mr Love: There has been a chequered history in this area and the developers have held back in the past at the very time when you are trying to bring land forward.

  Mr Whiting: Yes indeed, although, to be fair, the development land tax at one stage was looking at an 80% rate of tax. There is no way that the planning gain supplement is looking at that. One approaches it with an understanding of the aim, welcoming the local nature, but let us be cautious and let us see if we can get there and if there is a sensible way forward then okay. But is it really just a question of looking at the planning process and encouraging developers to enter into negotiations over what should be contributed? Perhaps that could be a better route. Let us go into it with an open mind.

  Mr Weale: If you think you need a tax that has to accrue to the local authority to encourage them to change the way they handle their planning rules then it seems to me that there is something very badly wrong with the planning process. They should not need a bribe to do something that makes economic sense.

  Q90  Mr Love: I think there are further recommendations coming forward on planning changes. Kate Barker suggests that we should be very cautious in this area and that the percentage of tax would be relatively low, but in her analysis she also suggested that the cost of the planning gain supplement would be passed back to the landowner if for no other reason than because of the constraint of second-hand house prices. Do you agree with that?

  Mr Weale: Yes. What it means is that the initial landowner will get a lower price for the land than she/he would without the tax and seen in those terms that has many of the characteristics of an ideal tax. When you start to think about the mechanics of it, maybe then there are people who will not bother to foster development, then you start to see disadvantages. It will impinge on the tax owner. It will not impinge on the house buyer.

  Q91  Mr Mudie: This is included in the Pre-Budget Report under the title "Meeting the productivity challenge". I am just puzzled as to why this is in that part of the Budget. In the same Budget, when you look at page 5, where they list the items under this heading, there is nothing about education. There is something about skills, but skills challenges are often a matter of picking up the lack of achievement in ordinary education. Is this a proper place for it or is this just an indication that we are not properly focused on meeting the productivity challenge? Why is housing seen as a central part of meeting the productivity challenge instead of improving education?

  Mr Chote: Presumably because a more efficiently functioning housing market would help labour mobility and that is going to help in the end. As you say, some of the classifications of things and what the measures come under cause you to raise your eyebrows a little. I was particularly entertained by the freezing of the increases in fuel duty coming under protecting the environment!

  Angela Eagle: Perhaps if you included the installation and the support for that there might be some equilibrium about the environment.

  Chairman: In terms of the productivity aspect, I heard the Chancellor saying that houses were to be built in areas near businesses or where businesses want them. I think that was the link with productivity.

  Q92  Susan Kramer: If you are going to get more land out of the planning, would you be more in favour of the equivalent of site value rating; in other words, taxing empty, undeveloped land rather than taxing at point of development? It seems to be the obvious alternative.

  Professor Talbot: The answer to your question is I do not know. It seems to me that Martin was absolutely right to say that this is a policy issue which is about land. One of the things I find extraordinary about this is that we consider the land issues in two completely different policy silos, one about agriculture and one about housing and actually those things need to be taken together. If we are going to look at a long-term reduction in subsidy to agriculture then we ought to be looking at how that land can be released for other things, one of which would be housing.

  Q93  Susan Kramer: The Operating and Financial Review, to what extent was that going to be a useful tool in helping shareholders better understand their investments and become more engaged? What was your opinion of it?

  Mr Whiting: I think in general we saw the Operating and Financial Review as a good way forward. It promoted more openness, there were more general statements about what was going on and we supported it. It seemed to be a way forward in terms of just generally encouraging more openness and more transparency. I am not an expert in it because I am just a tax man—

  Q94  Chairman: Is this you trying to get the sympathy vote?

  Mr Whiting: We promote more openness in the reporting process including over taxes, so to us it seemed a sensible way forward.

  Q95  Susan Kramer: Just from looking at your clients, basically corporations are prepared to roll this out.

  Mr Whiting: It was in the planning. There has been a good deal of work into it because obviously a lot of our clients are large PLCs which have to factor it into their planning and preparation. Most of them have put a good deal of effort into gearing up, some have already started to publish OFRs along the lines which are required because, after all, this was an industry-initiative from the accounting bodies, a lot were part way, at least, down the track.

  Q96  Susan Kramer: Much benefit from scrapping it?

  Mr Whiting: I do not immediately see it. I think one could think of other things that people would rather see scrapped.

  Q97  Chairman: You would not bring it under the red tape issue, maybe just a knee-jerk reaction for the Chancellor before his annual meeting?

  Mr Whiting: I could not comment on that. It is a mixed bit of red tape cutting.

  Q98  Lorely Burt: I would like to return to the pensions issue but perhaps from the other end of the spectrum. Looking at the pensions tax simplification and SIPPS, we did hope that if residential property was going to be taken out of the SIPPS, with the exception of this Real Estate Investment Trust idea, that it would have been done a lot sooner, quite honestly.

  Mr Whiting: Yes.

  Q99  Lorely Burt: I am interested to know what you think. First of all, do you think the Chancellor was right to take residential property out, and why do you think it took so long?

  Mr Whiting: It is one of those things where it is a difficult balance, of course, and in some ways there is a deal of disappointment because the whole aim of the pensions reform is simplification, deregulation, et cetera. One recognises that particularly with a certain amount of media and other pressures that have been around, people might be pushed into unfortunate investment selection and, therefore, maybe it is right to constrain the investment. I have to say I hoped one could get to that by good advice, guidelines and publicity rather than regulation. Obviously one worries that the regulations to be imposed will be a little too extreme, extreme in the sense of too complex. The net result of saying if you want residential property in your SIPP you can go into it via a REIT—that fine Yorkshire investment vehicle—is not perhaps such a bad thing. You do at least have the option to go there, I doubt whether anybody seriously wanted to put their fine wines or classic cars in there, and other things which are prevented. I think the disappointing feature, as you alluded to, is that it has taken a long while to get there which suggests a bit of havering and worrying about do we go down there. Undoubtedly given where we are now or where we are going to be, it would have been far better had that been laid down at the start.


 
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